Small-cap funds are equity mutual funds which invest primarily in small-cap companies. These companies are generally those which have a market capitalisation of less than ₹5,000 crore.
Small cap companies are relatively smaller in size and have significant growth potential. Small-cap funds are believed to have a high return potential but they come along with several risks.
According to the Value Research data, small cap funds delivered a return of 5.10 percent in March 2022. However, in the first two months of this calendar year, these funds posted negative return. In February, it was -7.57 percent and in January, the return was -1.06 percent
If we closely look at the quarterly returns, the March quarter returns of small cap funds were -3.87 percent, whereas the figure was 5.14 percent in December quarter, and 11.95 percent in September quarter.
Returns posted by small cap funds
| Period (2022) | Return (%) |
| January | -1.06 |
| February | -7.57 |
| March | 5.10 |
| March quarter | -3.87 |
(Source: Value Research)
While commenting on the reason for fall in small cap funds lately, Dhirendra Kumar, CEO, Value Research explains: “When markets fall, small cap funds fall more freely. But small caps are not falling that freely if seen on a relative basis. Large cap, mid cap, flexi cap and even BSE 500 funds are also falling. And the reason is quite understandable. This particular sell-off is driven by foreign investors and they have bigger holdings in large cap companies.”
“What is disappointing for new investors is that they only chase performance,” he adds.
In the following chart, we try to analyse the returns posted by numerous small cap fund schemes. Incidentally, most these schemes posted returns in negative territory in the past three months barring a couple of exceptions.
Returns by small cap fund schemes in past 3 months
| Mutual fund scheme | Three month returns (%) |
| Quant Small Cap Fund | 2.06 |
| Canara Robeco Small Cap fund | 4.23 |
| Nippon India Small Cap Fund | -1.92 |
| IDBI Small Cap fund | -1.22 |
| DSP Small Cap Fund | -1.66 |
| Axis Small Cap Fund | -0.98 |
| ICICI Pru Small Cap Fund | -0.14 |
| UTI Small Cap fund | -2.26 |
| Sundaram Small Cap Fund | -4.46 |
(Source: mutualfundindia.com)
It is worth noting that most small cap fund schemes posted muted returns in past three months. The few small cap schemes that posted positive returns include Quant Small Cap fund with a return of 2.06 percent and Canara Robeco Small Cap fund with 4.23 percent return in the last quarter of 2022 fiscal.
Most other schemes posted returns in negative territory, as shown in the chart above.
It is interesting to note that the decline in small cap funds is steeper than that of other categories of funds including mid cap, multi cap, flexi cap, large cap and large & mid cap.
As mentioned, the small cap funds posted negative return to the tune of 3.87 percent in March quarter, whereas mid cap funds fell by relatively lower volume i.e., 2.95 percent, multi cap funds fell by 1.26 percent, flexi cap fund declined by 2.45 percent, large & midcap funds fell by 2.27 percent, and large cap funds showed their robustness and strength by showing a small decline of 0.51 percent.